The building blocks of a successful digital captive
Captives are a high-end niche within the corporate insurance space. Within this small space, there still lies a high level of diversity and complexity, making it perhaps the last frontier in the race towards digitalisation of the insurance industry. But perhaps the most promising and disruptive.
The complexity of these programs made it hard for large carriers to introduce them into the standardised format of their legacy systems. Additionally, the traditional tech industry’s high priced and technically rigid infrastructures, made it difficult to justify the investment. However, the combination of social-economical, technological and political changes we are currently living may present a shift in the captive space and corporate insurance as a whole.
Throughout my experience with captive managers, the two main questions are always: what is the status of X policy and where is my money? This translates into not only insurance or credit risk, but mainly an enormous coordination and communication effort. Top managers’ ability to have a clear oversight of their programs is limited by the inefficiencies of the tools they, and the structure below them, are using; mainly email and excel.
Blockchain has recently been touted as the ultimate insurance disruptor. However, blockchain in itself has been around for more than thirty years and the benefits of a secure distributed and immutable database had so far not outweighed the difficulties. Today things might be about to change, thanks to the complementary technological potential of smart contracts and APIs (application programming interfaces).
Distributed ledger technology allows us to always have an up to date, reliable source of truth across various parties. In simple terms, think of this as a magical Excel sheet, where people are only allowed to see or make changes where they should, and everyone involved always has the latest version of any change. Additionally, every change made and who made it, is recorded in an immutable record. Always allowing us to know who did what, when and where, and who is next in line to do their own work.
Smart contracts, which are neither really smart nor a true legal contract, are a computerised logical sequence that allows us to automate business processes, much in the way we automated industrial processes in the past decades. A simple common business example would be, business expense OF LESS THAN x amount, PLUS digital copy of the receipt, will be payed, IF my type of expense, digitally detected from my receipt is within the travel guidelines. The Expensify App has been doing this for a while, but implementing business process automation requires still a lot of manual checks due to the risk of reconciliation between various versions of a record and inputs from a variety of disconnected IT systems. This is where APIs come into play.
Connectivity between IT systems has existed for many years, but the technological and regulatory (PSD2 in Europe for example) advances in the past couple of years, are allowing us to communicate in a more simple and secure format between entities than ever before. Simply put, three years ago, we would have not been able to effectuate the types of transactions we can do today between for example a bank and its corporate client. APIs allow corporates to connect not just with banks, but their own or their supplier’s ERP or TMS, third party sources of truth such as Bloomberg or Thomson Reuters. This connectivity is now allowing for various systems to stay constantly in sync, and the possibilities of this are only beginning to be explored. The example I often give on how traditional connectivity works is to imagine you want to know if you have received a $32 payment from your friend Sally. You request this information and receive it in a day or two by post or maybe you can’t and need to wait till the end of the month. You then open an envelope, extract your bank statement with its letterhead and legal mentions, you find the details of all your transactions and finally on page 3 you find the line which confirms you have received the $32 payment from Sally. You then go to WhatsApp and let Sally know that you got the money. In technical terms, the bank’s legacy system would take this payment and every other piece of information that they had decided should be shared with you, packaged it in a very heavy format and transported it in an old and slow protocol, where then your company’s IT system would have to unpack it, find the exact piece of information needed and then put it into its own corporate format. Today, thanks to some of the newest APIs, an approved system can make an automatic and real time request for information or transaction, that automatically appears in the format that is needed by the client. The moment your friend Sally deposits the money, both you and her get a WhatsApp message saying the money has been transferred.
These three technological pieces, following a streamlined process, have allowed us to create the flexible, lightweight and interconnected infrastructure that would allow us to manage the complexities of a captive insurance programme and maintain the flexibility needed to serve the individual needs of different captives. Such a system can handle risk data collection from around the world, manage issuance of policies in the opposite direction, trigger and reconcile premiums on their way back and help handle claims back down.
The benefits of proper data management and automation would then allow (regulation permitting) to expand the captive market. Organisations that today cannot access this type of programme, would finally be able to achieve the cost benefit of such structure. A fully digital captive might allow corporates to see the benefits that today only new retail players such as Lemonade can offer. The insurtech founder, famously stated that Lemonade was not an insurance company with an app, but a tech company that sells insurance. In my view, for captives to achieve these benefits the problem is not tech in itself, but in the adoption of a digital mindset.